The Consumer Response to House Price Falls

Movements in house prices and consumer spending are closely correlated in many developed nations. Much debate exists on whether this relationship is in any way causal arising from either wealth effects or collateral effects. This paper uses a unique survey question on self-reported responses to house price falls to explain the relationship between house price movements and consumer spending among households in the United Kingdom. 30% of households report they would cut back their spending as a direct response to house price falls. Econometric analysis suggests that among homeowners this response is driven by collateral effects. However, perhaps surprisingly, one third of those reporting they would cut back their consumption are renters. We argue this reaction is also driven by credit availability: both renters and homeowners who report they face credit constraints are more likely to cut back their consumption when house prices decrease, suggesting they perceive house price movements as indicative of aggregate financial market conditions.